How to view the impact of fiscal tilt towards consumer spending on people's livelihoods?

The Ministry of Finance's press conference clearly stated that a new round of large-scale stimulus will be gradually introduced. The market is paying close attention to the effect of fiscal expenditure shifting towards the field of people's livelihood consumption. This article reviews the domestic and foreign experiences of fiscal expenditure tilting towards people's livelihood consumption. After the Great Depression in the United States, fiscal expenditure tilted towards social welfare, helping the economy to recover rapidly. Ten years after the burst of the bubble in Japan, fiscal expenditure shifted towards social welfare, helping to reduce the unemployment rate, but the effect on stable growth was not significant. This may be due to the late policy changes, deeply rooted deflation expectations, high aging population, and sustained weak domestic demand. In addition, experiences from the United States and Japan both show that fiscal expenditure tilting towards social welfare helps alleviate local debt pressure. Domestic experiences show that from 2006 to 2012, China vigorously strengthened the social security system, driving strong domestic demand, with consumption growth consistently outpacing GDP growth. Academic research also shows that the policy multiplier of fiscal expenditure on people's livelihood is higher than government investment. The political meetings in July and September required economic policies to tilt towards benefiting the people and promoting consumption, expecting policies to better stimulate the private sector. In terms of tracking macroeconomic operations, industrial production and demand high-frequency data have stabilized at a low level, while downward pressure on prices remains significant. This week, the market is focusing on the US CPI in September and the press conference of the National Development and Reform Commission and the Ministry of Finance in China. Next week, the focus will be on China's economic, import and export, and financial data for September.

▍The Ministry of Finance's press conference clearly stated that a new round of large-scale stimulus will be gradually introduced. The market is paying close attention to the effect of fiscal expenditure shifting towards the field of people's livelihood consumption. This article reviews the domestic and foreign experiences of fiscal expenditure tilting towards people's livelihood consumption.

Although the Ministry of Finance's press conference did not specify the amount of incremental policies, statements such as "the largest support for debt-for-equity swaps in recent years," "the central government still has a large borrowing space and deficit increase space," and "issuing special national bonds to supplement the core Tier 1 capital of state-owned major banks" indicate that the scale of incremental fiscal tools should be relatively large. Increasing the resolution of local government debt, supplementing the capital of state-owned major banks, supporting the real estate market, and increasing support for key groups are the four major focus points that have been clearly identified. Given that the central political meetings in July and September 2024 both emphasized that the focus of economic policies should tilt more towards "benefiting the people and promoting consumption," subsequent incremental fiscal policies to support people's livelihood consumption may be studied and introduced gradually. This article reviews the international horizontal experiences and domestic vertical experiences of fiscal policies tilting towards benefiting the people and promoting consumption, providing references for analyzing policy effects.

▍After the Great Depression in the United States, fiscal expenditure tilted towards social welfare, helping the economy to recover rapidly; ten years after the burst of the bubble in Japan, fiscal expenditure shifted towards social welfare, helping to reduce the unemployment rate, but the effect on stable growth was not significant.

In addition, experiences from the United States and Japan both show that fiscal expenditure tilting towards social welfare helps alleviate local debt pressure. During the accelerated urbanization period in the United States and Japan, the focus of government fiscal expenditure leaned towards infrastructure investment, leading to rapid growth in local government debt, similar to the current situation in China. As urbanization slowed down and the Great Depression occurred, the United States shifted fiscal expenditure towards social welfare (increasing from 7.5% to 34%), promoting rapid economic recovery without a significant increase in total debt growth. Ten years after the burst of the bubble in Japan, fiscal expenditure shifted towards social welfare (increasing from less than 20% to 33%), helping to reduce the unemployment rate from above 5% to below 3% However, the effect of stabilizing growth in China is far less than that in the United States, possibly due to the late policy changes, deeply rooted expectations of social deflation, a high aging population, and sustained weak domestic demand. In addition, after the United States and Japan tilted fiscal spending towards social welfare, the growth of local government debt has slowed significantly, while the central government debt ratio has increased. For example, the central government debt ratio in the United States increased from 21% in 1913 to 88% in 1952.

▍Domestic experience shows that from 2006 to 2012, China vigorously strengthened the social security system, which drove strong domestic demand, with consumption growth consistently outpacing GDP growth. Academic research also shows that the policy multiplier of fiscal expenditures on people's livelihoods is higher than government investment.

From 2006 to 2012, China vigorously strengthened the social security system, enhanced the fairness of public resources between urban and rural areas and regions, and increased support for education, healthcare, employment, and social security. From 2008 to 2019, China's consumption growth rate (average 13.4%) remained higher than GDP growth rate (average 8%), indicating a trend of consumption upgrading. Although the stabilizing effect of fiscal spending tilted towards social welfare may take effect slowly, it helps cultivate more sustainable endogenous momentum and address the current weakness in private sector momentum. Academic research also shows that the policy multiplier of fiscal expenditures on people's livelihoods (average multiplier of about 1.7 times in sample papers) is higher than government investment (average multiplier of about 0.8 times in sample papers). The political meetings in July and September required economic policies to tilt towards benefiting the people and promoting consumption, expecting policies to better stimulate the private sector.

▍Tracking Macroeconomic Operations: Industrial production and demand high-frequency data are stabilizing at a low level, while downward pressure on prices remains significant.

In terms of high-frequency industrial data, demand-side high-frequency data for real estate, infrastructure, automobiles, and other sectors in September stabilized at a low level, with the average capacity utilization rate of the six major industries remaining unchanged from the previous month, indicating signs of a bottoming out in the economy. High-frequency price data also show significant downward pressure on prices, with prices of traditional energy-related coal, coke, steel, and non-metal building materials continuing to fall, while prices of new energy-related and electronic products are falling, and prices of non-ferrous metals are rising. This week, the market is focusing on the U.S. CPI for September and press conferences by China's National Development and Reform Commission and Ministry of Finance, while next week will focus on China's economic, import and export, and financial data for September.

▍Risk Factors:

International experience has limited guiding significance for China, and if fiscal policy measures fall short of expectations, the policy transmission effect may also fall short of expectations